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Sometimes it is just overregulation. A few years ago some professor from Brussels told me that cable internet is a natural monopoly. I told him that in Sofia (Bulgaria) you have a choice between 5-6 different internet or cable TV providers, no monopoly at all (internet is fast and cheap). He was shocked.

BTW, this is a text from the president of Estonia about his experience with telecom:

Five years ago, when I moved from one Tallinn apartment to another, I called the telephone company to install an internet connection. The woman at the other end of the phone asked which time that afternoon – 1400, 1600 or 1730 – would be most convenient to come and install it? Three years ago, after being elected to the European Parliament I applied for an internet connection for my Brussels apartment. After seven weeks with no sign of it, I called my landlord, who had kindly offered to help out if I ran into any problems with the local bureaucracy. “Only seven weeks?“ was her response. She then added something especially funny for anyone from the post-communist world: “But maybe I can help, I have a connection on the inside“.http://www.europesworld.org/NewEnglish/Home_old/Article/tabid/191/Articl...

Perhaps it is one of the problems that plague the german provider market: traditional rooted monopolies. The german Telekom when it got privatized retained all rights to their publicly paid for cable network. They were in charge of maintenance and granting connections to competitors. This is why service in Germany is sometimes abysimal, especially when changing providers. Cable networks are not yet suitably distributed to force competition and wireless is still too slow. It is a case example of how not to privatize a sector.
Just compare it with France where the french telecom is one player amongst many and they usually have excellent service.

Is this not incomplete given the routing and space costs? (Maybe you mean to include those in the "cost of the pipe" but the issue is more than just "cost".)

For example, there are parts of Seattle metro (and I imagine other places) where regardless of money spent, there is not SPACE to run more than one set of water pipes. Also, on the other end, the water sources (rivers, aquifiers, etc.) are limited and it turns out that (unlike electricity or cable TV) there's a "natural monopoly" associated with control of watersheds of various sorts.

An additional weirdness is how is water related to sewer? In Seattle metro, they are part of the same bill, and we pay more for sewer than we do for water - in fact, even if you could somehow gather all of the water you used as rainwater (which might be technically illegal by the way) you'd still have quite bill you'd be required to pay. Part of this arises from large concentrations of people in relatively small areas with important ecosystems nearby.

Libertarian leaning free-market fan that I am, it's not clear to me how a competitive market can work in these constrained circumstances, given population density above a certain threshold.

I'm sorry to disagree with this common explanation of "natural monopolies" in the fields of water provision, as well as telephone, gas or electricity. Historically, this explanation has been "a posteriori" one. Before the intervention and thorough regulation of the state, at the turn of the XXth century, there were a great number of companies offering these basic services. As Thomas di Lorenzo has studied, it was the mutual benefit of the state and the regulated entities, that erected barriers to entry and limit the competition.